(Bloomberg) — Government bonds across the US and Europe fell as the panic that gripped global markets earlier this week continued to subside.
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German bonds led losses, with yields rising at least five basis points across the curve and erasing a drop since Friday. US Treasuries also weakened as money markets unwound wagers on deep interest-rate cuts this year.
It’s an early sign that some normality is returning to markets after the historic volatility unleashed in recent days. Unexpectedly weak US jobs data and an interest-rate hike from the Bank of Japan roiled global markets, driving investors into haven assets.
“The market is trying now to establish a new normal,” said Andrew Ticehurst, rates strategist at Nomura Holdings Inc. in Sydney. “We’re in for a period of very choppy consolidation.”
The ructions continued to cast a shadow of uncertainty. Investors say bonds are likely to keep taking their cue from equities, with any fresh selloff sending them rushing back to the safety of high-quality sovereign debt.
“Volatility remains high as participants remain somewhat on edge with the rebound in equities still looking a little fragile,” said Michael Brown, a strategist at Pepperstone Ltd. Fixed income is likely to remain a “proxy for risk appetite” until the market settles down, he added.
Recession Fears
The market for now is also winding back bets on aggressive policy easing from the Federal Reserve, an idea that gained traction after Friday’s jobs report.
Just over 100 basis points of interest-rate cuts are now expected this year, compared with around 150 basis points two days ago, when traders piled into wagers that the US was sliding into a recession.
While US Treasury yields have bounced off the recent lows, yields remain well below where they were just one week ago. The two-year rate, among the most sensitive to monetary policy, is trading just above 4%, having plunged to 3.65% on Monday.
Still, a $58 billion three-year note issuance on Tuesday attracted strong demand, with attention on Wednesday turning to a 10-year sale. The Treasury is poised to lock in a yield below 4% for the first time in a year.
Inflation Protection
Meanwhile, mounting concerns over a downturn have crushed market gauges of inflation expectations both in the US and Europe.
The 10-year US breakeven — the difference between the yield on inflation protected securities and standard Treasuries — tumbled through 2% this week for the first time since late 2020. The 30-year breakeven posted a similar move.
“At the moment, the market looks to be weighing bad macro data more than constructive macro data. And that sentiment may last for a while,” said Erik Weisman, chief economist and a portfolio manager at MFS Investment Management. He is waiting for a better entry point to buy long-term inflation protection.
The Franklin Templeton Institute recommends that investors take profits on US Treasuries after the recent gains, and like Weisman, reckons it’s still too soon to suggest the economy is heading for a downturn.
Others though see a more imminent threat.
“We are heading into a recession I think later this year, early next year,” said Peter Berezin, chief global strategist at BCA Research. “This is unfortunately going be just the first salvo of what’s going to be an increasingly ugly market environment for stocks.”
(Updates with context and comments from ninth paragraph.)
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